Oil Futures Rally in Whipsaw Session

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and Brent crude on the Intercontinental Exchange registered healthy gains in ending the first day of trade in 2019, with West Texas Intermediate and Brent posting two-week highs before paring the advance in yet another whipsaw trade session.

Oil futures reversed higher in midmorning trade Wednesday as wire services released the findings of their surveys for crude production by the Organization of the Petroleum Exporting Countries, which found OPEC output dropped 530,000 barrels per day (bpd) to a 32.6 million bpd five-month low in December.

The drop in monthly output was led by Saudi Arabia, with the kingdom estimated to have reduced production by 420,000 bpd to 10.65 million bpd. Bloomberg reported Saudi crude exports dropped 464,000 bpd from November to average 7.253 million bpd in December, with the kingdom cutting oil exports to the United States and China.

Iranian crude production is estimated down 120,000 bpd to 2.92 million bpd in December—the lowest monthly output rate by the Islamic Republic since December 2015, which was the last month of a previous round of sanctions from 2012 to 2015. The United States phased in reimposed sanctions against Iran in August and November 2018, with U.S. sanctions targeting Iran's oil exports taking effect in early November.

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Lower OPEC crude production comes ahead of OPEC+ production cuts of 1.2 million bpd, which took effect Tuesday and run through the first half of 2019. OPEC's responsible for 800,000 bpd of those cuts, with the Saudis expected to reduce output well above their reported 250,000 bpd quota.

The bullish data on oil supply more than countered concern over global oil demand following the overnight release of bearish manufacturing data from China and eurozone, with U.S. manufacturing slowing more than expected in December. China's Caixin Manufacturing Purchasing Manager's Index showed China's manufacturing sector dipped into contraction in December.

Market watchers remain uneasy with their forward outlook, pricing in the potential for slowing world economic growth to ratchet back world oil demand. This sentiment whipsawed oil futures during the fourth quarter 2018, with increasing deployment of algorithm trading driving sudden market reversals and sharp price swings. The pattern is expected to remain at least through the first couple of months in 2019.

A key feature to watch will be trade negotiations between the United States and China, with the largest and second largest economies currently respecting a 90-day truce in their trade dispute that runs through March 1. Investors are fearful failure for the two countries to reach an agreement would escalate their trade dispute into a protracted trade war that could tilt the world economy into a recession. Those concerns were modestly assuaged on reports last week that a U.S. trade delegation would travel to China this month.

Nymex February WTI futures rallied to a $47.78 barrels (bbl) two-week high on the spot continuous chart before paring the advance with a $46.54 bbl settlement, up $1.13. ICE March Brent registered a $56.56 bbl two-week spot high before settling up $1.11 at $54.91 bbl.

Nymex February ULSD futures reversed higher from a $1.6424 gallon 16-month low on the spot continuous chart to post a one-week high at $1.7489 before settling up 2.12 cents at $1.7006 gallon. February RBOB futures also traded a wide 11.05cts range, posting a $1.3790 two-week spot high ahead of a $1.3256 gallon settlement, up 2.35 cents.

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Brian Milne

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